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Is Your District’s Life Insurance Benefit Considered Taxable Income?

Kalli Ortega, SPHR
November 1, 2017

I have had several conversations recently with Fire Districts about the life insurance benefit offered to their members.  Whether it’s Districts that have called me in as a fresh set of eyes to review their benefits package or have called me in to help with union negotiations, the amount of life insurance has been a hot topic.  Some Districts have always had 2x salary life insurance benefit or flat $100,000 life insurance benefit in force.  Other Districts have had their union request an increase to their life insurance benefit as part of the contract negotiations.  In both scenarios, I always mention the IRS’s position on group-term life insurance benefits over $50,000 – it’s taxable income!   IRC section 79 states that, for group-term life insurance policies, “The imputed cost of coverage in excess of $50,000 must be included in income, using the IRS Premium Table, and are subject to social security and Medicare taxes.” 

So what does that mean? 

If your policy is for $50,000 or LESS, you’re good, no calculations needed.  If the benefit is GREATER THAN $50,000, the cost for any amount over $50,000 needs to be calculated into taxable income using the IRS table below.  This is called “imputed income”.

 

IRS Premium Table for Group Term Life Insurance

Monthly Cost per $1,000 of Coverage

Age*

Rate

Under 25

$0.05

25 – 29

$0.06

20 – 34

$0.08

35 – 39

$0.09

40 – 44

$0.10

45 – 49

$0.15

50 – 54

$0.23

55 – 59

$0.43

60 – 64

$0.66

65 – 69

$1.27

70 and over

$2.06

*Use employee’s age on December 31, 2017, when imputing income for the tax year 2017.

 

Need an example?

Anytown Fire Protection District has an employer-paid life insurance benefit of 2x salary.  A 47-year-old Firefighter earns $90,000/year.  The Firefighter’s life insurance benefit is $180,000.  The value of the amount on which the Firefighter must pay taxes is $130,000 ($180,000 - $50,000).  To calculate imputed income, $130,000 is divided by $1,000 (since IRS table I rates are per thousand), then multiplied by $0.15 (the IRS Table I rate for a 47-year-old).  The result is $19.50 per month, or $234.00 per year, for this Firefighter.

What About Voluntary Life Insurance Benefits?

Group “voluntary” life insurance benefits (100% employee paid), may be subject to the same imputed income rules for amounts over $50,000 despite the fact that employees pay the entire premium. If the payroll contributions are pre-tax through a Section 125 Cafeteria Plan, the IRS considers it an employer plan and imputed income applies for amounts in excess of $50,000. 

 

If payroll contributions are post-tax, another calculation is needed.  Compare your voluntary life insurance premiums against the IRS rate table.  If your rates result in at least one employee paying more and at least one employee paying less than the IRS rate table, they are subject to imputed income. This is referred to the IRS “straddle” rule.  Below is a sample rate comparison:

 

Voluntary Group Term Life Insurance Rates

Monthly Cost per $1,000 of Coverage

Age*

IRS Rates

Insurance Carrier Rates

Under 25

$0.05

$0.05

25 – 29

$0.06

$0.06

20 – 34

$0.08

$0.08

35 – 39

$0.09

$0.08

40 – 44

$0.10

$0.09

45 – 49

$0.15

$0.15

50 – 54

$0.23

$0.23

55 – 59

$0.43

$0.45

60 – 64

$0.66

$0.68

65 – 69

$1.27

$1.27

70 and over

$2.06

$2.06

*Use employee’s age on December 31, 2017, when imputing income for the tax year 2017.

 

In this example since some employees would pay more than the rates on the IRS table while others would pay more, the plan is subject to imputed income calculations.  Also be aware that this rule applies to premiums for spouses and dependents as well.

 

Since offering additional life insurance can be a great benefit, you can prevent the plan from being subject to imputed income by:

 

  1. Ensuring that life insurance payroll contributions are paid post-tax, outside of your Section 125 Cafeteria Plan.

 

  1. Avoiding “composite” or flat rates for voluntary life insurance premiums. These will typically “straddle” the IRS Rate Table and be subject to imputed income.

 

  1. Offering a plan with age-rated premiums that are either:
    1. All Equal To Or Greater Than the IRS Rate Table
    2. All Equal To Or Less Than the IRS Rate Table

 

W-2 Reporting & Tax Questions?

If you determine that your group-term life insurance policy (or policies) are viewed by the IRS as taxable income, the imputed amount must be included in the employee’s W-2.  It is at this point that I recommend you consult your accountant and payroll vendor to ensure you accurately report for the 2017 tax year. 

 

Lastly, if you’re interested in a light read from the IRS, the links below have all the details:

 

As always, your benefits advisor is there to help you too!  Reach out anytime with questions.

 

?Kalli Ortega, SPHR
Vice President of Corkill Benefits
Corkill Insurance Agency, Inc. | Website: www.corkillinsurance.com
Direct: 847.437.2956 | Cell: 847.421.2060 | Fax: 847.239.1153 | eMail: KOrtega@corkillinsurance.com
25 Northwest Point Blvd. Suite 625 | Elk Grove Village, IL 60007